Peg compensation to productivity

M.C. Escher’s famous 1960 lithograph Ascending and Descending shows a rooftop staircase rising continuously, and impossibly, as it wraps around a building’s central courtyard. The fact that it is an illusion is obvious, but it is hard to pin down the cause; is it in the stairs themselves, or in the perspective allowed to the viewer? Government spending statistics sometimes give the same impression.

The Parliamentary Budget Office (PBO) released a study this month of the rapidly rising costs of staffing the federal public service. The most prominent figure from that report was the $114,100 spent on the average federal employee’s full-time-equivalent salaries and benefits. To be sure, that is a large number — and it doesn’t even include the cost of supplying the desks, carpeting the floors and heating the air around them. Any business owner understands, however, dollar figures don’t mean much without an appropriate benchmark.

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From the PBO’s report we know the cost, but we don’t know the value. Unfortunately for all of us, value is a tough concept to measure objectively, particularly in public services. The stakes are high. Roughly 3.6 million people work in the broader public service — about one worker in five. Getting the value notion wrong has huge implications on the dollars the rest of us have to kick in. Absent a direct way to measure public-sector employees’ value, the best alternative is to benchmark off the private sector.

Compensation levels are ultimately set by the productive capacities of individuals. If wages and benefits are set too low, people shop themselves to better opportunities; if set too high, it’s the employer who’s encouraged to look around for alternatives. As much an art as a science, the whole process of job competitions, performance reviews and staff development is aimed at getting the value measurement right. Furthermore, the broad private sector must follow another natural law: survival of the fittest. Businesses that get the balance right supplant the ones that don’t. In an open, competitive economy, the resulting wage levels range widely, but ultimately align with the value of work being done.

It is clear from the PBO report, and other observations, that public-sector salary increases are set by what happens in the broader economy — measured by the consumer price index, average weekly wage levels, etc. If average salaries are growing at, say 3%, then public-sector unions demand, and usually get at least that amount at contract time. In other words, public-sector wage increases are not based on their own improvements in productivity, but on the productivity gains of others. This is not necessarily a problem if underlying wage levels also correspond to the private sector; the trouble is they don’t.

Doing wage-level comparisons on an “apple-to-apples” basis is neither easy nor precise, which the PBO report partly acknowledges, because the mix and types of jobs differ. But when and where studies are done duly to account for these differences, average public-sector compensation is shown to be higher. CFIB’s Wage Watch series, which for the past 20 years has been using census salary and occupation data, shows a persistent public-sector advantage ranging from 8% to 17%, depending on level of government — much more if we account for benefits. Unions have taken offence, but they haven’t demonstrably refuted our findings.

It would have been helpful to see the PBO go further and do something similar — indeed its report cited some examples from elsewhere. The Congressional Budget Office in the United States and the U.K.’s Office for National Statistics respectively measured 16% and 7% advantages for their public sectors when key worker and job characteristics were taken into account.

Showing Canada’s staircase of government staffing costs from this different perspective would rightly separate fact from illusion.

Ted Mallett is vice-president and chief economist for the Canadian Federation of Independent Business. He can be followed on Twitter at @cfibeconomics

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